IRS Changes EIN Application Policy - Requires an Individual “Responsible Party”

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The IRS announced on March 27, 2019 that the “responsible party” on applications for an employer identification number (EIN) must now be a natural person.  Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN).  The new requirement is intended to enhance security and improve transparency. 

An EIN is the tax identification number assigned to entities such as trusts, estates, retirement plans, LLCs, partnerships, and corporations.  An entity obtains such a number by completing the IRS Form SS-4 or an online application.  One question in the application process asks the applicant to identify the “responsible party,” which the IRS defines as “the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity.”  In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party. In the past, a non-natural person, such as a trust, estate, or business entity (LLC, Corporation, or partnership) could be a "responsible party."  According to the IRS,"[t]he change will prohibit entities from using their own EINs to obtain additional EINs." 

In deciding who to list as the responsible party, the IRS encourages applicants to consider whether the party has “a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.”  The Form SS-4 Instructions provide a detailed explanation of who should be the responsible party for various types of entities. Only governmental entities and the military are exempt from this requirement, and may continue to list non-individual entities as the responsible party.

 If there are changes to the responsible party, the entity can change the responsible official designation by completing Form 8822-B, Change of Address or Responsible Party. A Form 8822-B must be filed within 60 days of a change.

This policy will go into effect for all EIN applications submitted on and after May 13, 2019.

More:

To read an article explaining why you should consider retaining a professional to apply for and obtain a an EIN, go here.

If you are confused about what a TIN, ITIN, and/or EIN  is, go here.

Retain an Attorney or Accountant to Seek and Obtain a Taxpayer Identification Number for a Trust

Seemingly simple decisions can cause unexpected difficulty administering an estate. Among these is the decision whether to utilize an attorney or accountant to  file for and obtain a taxpayer identification number (TIN) for a trust.  

Most revocable trusts change their tax and legal status upon the death of the last surviving grantor. Sometimes called a settlor, the grantor is the person that generally creates and contributes property to a trust that benefits the grantor during his or her life.  During the life of the grantor, particularly if the trust is revocable, the trust is considered a “grantor” trust under the Internal Revenue Code.  The significance of being classified as a grantor trust is that the trust does not have a separate tax existence; the grantor is not required to obtain a separate Taxpayer or Employer Identification Number (TIN or EIN), and the trust is not required to file a separate tax return.  The grantor affixes his or her social security number to assets requiring a TIN for the trust, and files only a personal income tax return.

Upon the death of the grantor, however, the IRS requires that the trust, which is now irrevocable, utilize a different TIN.  Simply, a trust cannot use the social security of a dead person.  If the trust has taxable income, the trust may also be required file a separate income tax return.  Thus, a successor trustee will typically file for and obtain a new TIN for the trust shortly after the death of the grantor. This application process is relatively simple, and common for attorneys and accountants familiar with trusts, the grantor trust rules in the Internal Revenue Code, and the distinctions between the the original revocable trust and the resulting irrevocable trust.  

Because the proper name and characterization of the trust on titles and accounts is important, attorneys will usually prepare for the successor trustee a Certificate or Memorandum of Trust, which permits financial institutions to properly title assets, and follow the instructions of the successor trustee.  These documents often identify the correct TIN. Filing for and obtaining the TIN, and preparing the Certificate or Memorandum of Trust is usually completed the same day, or within a few days of completion of the necessary forms, for a nominal fee: easy breezy nice and easy.

Increasingly, however, successor trustees are either filing for the TIN themselves, or relying upon professionals with neither accounting nor legal expertise to request and obtain the TIN.  The results can range from frustrating to devastating to the estate plan.

Consider the following examples of mistakes attorneys increasingly observe:

• The successor trustee goes to the bank in order to access the bank account.  The helpful teller advises the trustee of the need to obtain the TIN, and “assists” the successor trustee in applying online for the TIN.  The account is closed, and a new account is opened with the new TIN, and the trustee is given a piece of paper showing the TIN, and sent on his or her way.  The successor trustee goes to the next bank, broker, or financial advisor holding or managing trust accounts.  Confident that everything will go smoothly, the trustee presents the death certificate and the TIN to the institution with a polite request to liquidate the account.  The institution refuses, advising that they do not have everything needed.   The institution is unclear what the title of the trust is or should be, and what authority the successor trustee has regarding the account.  After several attempts the successor trustee is forced to contract an attorney to prepare documents that could have been prepared initially, which would have prevented the delay and frustration.

• The attorney in the foregoing example reviews the paperwork provided by the teller and realizes that the application is completed incorrectly, and that as a result the IRS will likely request the filing of Form 1041 trust income tax returns from the date of the creation of the trust through the present tax year.  In a “pay me now or pay me later,” series of alternatives, the attorney offers to correct the improperly completed application.

• The attorney in the foregoing example reviews the paperwork, but cannot determine whether the application for the TIN was properly prepared.  The teller prepared the application online, but did not print out a hard copy of the application. Concerned that improper preparation of the application will result in expense or loss to the trust, for which the trustee or heirs may seek to hold the attorney responsible, the attorney either (1) refuses to utilize the TIN and recommends abandonment of the TIN, charging the client for preparation of a new application, and paperwork abandoning the prior TIN, or (2) the attorney requires the trustee to sign an acknowledgment that use of the TIN may cause loss or expense, which releases and indemnifies  the attorney from loss resulting from continued use of of the TIN.

• The teller in the previous example identifies the grantor of the trust, now deceased, as the responsible party, since the grantor created the trust.  IRS correspondence is directed to the deceased grantor at the grantor’s last residence.  Because the property is promptly sold, the successor trustee is not advised that a Form 1041 income tax return must be filed. When the successor trustee learns that a return should have been filed, the trustee is forced to pay the tax liability, and resulting penalty and interest, from his personal assets since the trust assets were distributed. 

• An agent assisting a successor trustee in filling out a beneficiary claim form, assists the trustee in obtaining online a TIN, and opening a a money market account to hold the funds.  The successor trustee is the only beneficiary of the trust, and the recipient of various means-tested government benefits.  Although the trust was drafted to protect the assets for the benefit of the beneficiary, under state law, the protection is only effective if the beneficiary is not also the trustee.  Absent the important legal advice and direction to resign as trustee prior to filing the claim form he negotiates the account.  The trustee later learns that the claim of funds constituted income in the month that the claim was paid, thereby disqualifying the beneficiary from a host of government benefits, including free health care.  

• A successor trustee completes the application to obtain a TIN for the trust online, and proceeds to administer the trust estate.  The IRS sends letters demanding Form 1041 income tax returns for fourteen tax years.  The letters, unfortunately, are sent to the deceased grantor’s home, pursuant to the application, which home was promptly sold by the successor trustee.  The successor trustee is later contacted by a revenue agent.  With the assets of the trust long distributed, the trustee pays from her own funds an attorney and accountant to resolve the matter. 

• A family friend helps the successor trustee obtain a TIN, but writes down the TIN incorrectly.  Neither the friend nor the trustee realize the error.  The IRS contacts the taxpayer when a return is filed using the incorrect TIN.  An accountant is retained to investigate and resolve the problem.

Each of the foregoing represent actual cases. The application for a TIN may seem simple, but the terms used in the application, and the precise information requested can be confusing.  The fact that the application can be  prepared online may cause some to believe that the application is either very easy to complete, or that proper completion is unimportant.  Neither assumption is correct. 

Well-meaning professionals, such as tellers, bankers, insurance agents, brokers, and financial planners, and helpful friends may assume that they are are in safe waters completing the form for a customer or friend.  IRS rules require that third parties that complete the application identify themselves, and abide by record-keeping requirements, which rules the well-intentioned often fail to observe.  Failure to observe these rules may make impossible immediate solutions to online technical glitches or typograghical errors, thereby delaying adminstration of the estate.  Perhaps the ultimate tragic irony to the immediacy offered by the online application process is that failure to follow the third party disclosure, record preparation and record keeping rules may mean that a good TIN takes longer to obtain online than if it had been applied for by traditional mail.

Professionals should also be aware that there may be liability for applications prepared improperly, and that the professional insurance may or may not cover any loss.  Non-lawyers and non-accountants are properly cautioned that the completion of the forms, and the accompanying advice, may constitute the unauthorized practice of law, or exceed the scope of the professional's licensing.

Simply, retain an attorney or accountant to seek and obtain the TIN.

Sorting the confusion between SSNs,TINs, ITINs, and EINs

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If you are confused regarding taxpayer identification numbers, don't feel bad.  Although they are rather straight-forward and it is "technically" clear which you need in a particular situation, they are nonetheless confusing to lay persons, and even professionals that do not routinely apply for assignment of these numbers.  

Just the term Employer Identification Number (EIN) creates confusion, since it is not limited to just employers.  In fact, for this very reason, some financial companies. brokers, and insurance companies will not, on their forms, refer to an EIN, using instead the term Taxpayer Identification Number (TIN), when they clearly are requesting the former and not the latter.  Why?  The only explanation is that they know that your trust, for example, isn't an employer, and you will become confused that the request doesn't pertain to your trust.

There is another example of this type of practice regarding warning on tanks and tank trailers. "Flammable," right?  Well, except for the fact that there is, or at least was, technically no word, "flammable!" The correct word is "inflammable."  To avoid confusion, manufacturers use the "wrong" word rather than the "right," and for good reason- we wouldn't someone pounding, heating, or setting ablaze a tank that was labeled "inflammable," thinking incorrectly that it wouldn't burn or explode, right? In that same way, financial services companies use a more common reference Tax Identification Number rather than Employer Identification Number to "avoid" confusion. 

So let's see if we can clear any confusion.

What are Tax Identification Numbers? 

For the IRS to conduct its business, it must have an easy way to identify each individual, trust, and business or non-business entity. To do this, the IRS requires each individual and entity to have a Tax Identification Number. While most individuals use their Social Security Number (SSN) for filing taxes, most businesses and non-business entities, like trusts, must have a special tax identification number instead.

Please note that  we are referring generally to tax identification numbers.  There is a specific Taxpayer Identification Number (TIN) which the Service usually designates as (ITIN) for "Individual" Taxpayer Identification Number.   

SSN, ITIN or EIN: What’s the Difference?

There are three main categories of tax ID numbers: Social Security Numbers (SSN), Employer Identification Numbers (EIN) and Individual Taxpayer Identification Numbers (ITIN).  SSNs and ITINs are used for individuals. Generally, the ITIN is for those not eligible for an SSN, such as non-resident aliens or resident aliens not yet eligible for a social security number. 

For businesses and non-business entities, like trusts, the EIN is the most important tax identification number. Despite the name including "employer," it suits all businesses, or non-business entities such as a trust, even those with no employees. 

So one of the biggest clues what you need is "to what are you referring as the owner or beneficiary of the asset, account, or benefit?"  If you are referring to a trust, use the EIN for the trust.  

The trust usually uses your social security number if you are the Settlor/Grantor of a revocable trust.  When the trust qualifies as a "Grantor Trust,"  it is a disregarded entity which uses the Grantor's social security number.   

If the Trust is irrevocable, the trust may have a separate EIN, so you will need to either: 1) refer to the Certificate of Trust which will identify the EIN; or, 2) ask your attorney or accountant that obtained the EIN. Most attorneys make clear on the Certificate Trust is the irrevocable trust is treated by the IRS as a separate entity requiring an EIN, and typically will obtain one for the trust. 

Tax ID Numbers for Businesses

Most businesses require a special tax identification number for their filings with the IRS. Many other legal documents for businesses, including loan applications, bank account applications and permit applications, also require a tax identification number. Therefore, one of the first actions to take after setting up your business is to apply for an EIN.

Are There Exceptions?

There are cases in which business owners can use their own social security number rather than an EIN for filing taxes for their business. The two exceptions are sole proprietorships and certain LLCs, as long as the LLC does not have any employees. In these cases, the business owner can use his or her SSN in place of the EIN. However, even sole proprietors might need a EIN under certain circumstances, such as for excise tax returns or pension filings.

You have your choice of business structure, which might impact what type of Tax Identification Number you need. Start your tax ID application to receive your EIN number by filling out the form here. Alternatively, complete a sole proprietorship application and use your social security number instead. Our support team is available 24/7 to assist you with any questions you might have about filing these applications.

Do I Need an ITIN or Social Security Number to Get an EIN?

There are ways to get an EIN for your company without having either a Social Security number or an ITIN, but in most cases, you do use those other tax identifiers in your application. That’s because the IRS does require the person who takes responsibility for the registration to have one of these. If you do not have either identifier, you have two options.

• File for either a SSN or ITIN before applying for an EIN so that you can be listed as the point of contact for the company.
• Engage an accountant or lawyer willing to act as that contact for the company and submit their information so they can receive paper records regarding your EIN.

What Are the Differences Between a SSN and an ITIN?

The main difference is that the Social Security number is for those who are eligible for Social Security benefits, either at retirement or in the event of a disability. For residents of the U.S. and non-residents who own businesses in the country, the ITIN provides and individual tax identification option outside of Social Security. This is an important avenue for those who do not qualify for a Social Security number.

Can I Use a Tax ID Number for More Than One Business?

Generally, no. If your business needs its own EIN for any reason, you need to use a unique one that is just for that entity. Entrepreneurs with multiple companies they own as the sole owner, either through sole proprietorship or a single-member LLC, might have the option of lumping all their business taxes under one tax return by using their Social Security numbers and filing with Schedule C. Even then, if any of those businesses hire employees or seek bank loans, they will need their own EIN, and they will not be able to share.

Still Confused?

Your attorney or accountant will usually help you quickly identify and locate the correct number.  Rather than create additional work later, we suggest that clients fax or email the forms they are completing with an indication what they are trying to accomplish.   We usually will simply insert the correct "number" and send it back for completion.  Regardless, if you are confused, ask for help!

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